The growing role of bitcoin: What’s next for cryptocurrencies?
18 DEC 2014
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This week’s post is by Vincenzo Dimase, FX Market Development Manager Europe West at Thomson Reuters.
Since their introduction in 2009, cryptocurrencies have attracted the attention of a variety of stakeholders in the financial community, from private investors to financial institutions and authorities. In the new landscape of cryptocurrencies, bitcoin has the highest market capitalization.
Leveraging advanced encryption technologies, bitcoins:
- Are created using open source software
- Allow parties to a transaction to remain anonymous (although partially)
- More importantly, are not guaranteed or backed by any central bank, authority or institution
Within the cryptocurrencies ecosystem, the concept of trust shifts from a government to encryption algorithms; creation of money is transferred from central banks to computing systems; the intermediation role played by banks is replaced by the “block chain,” a ledger collecting records of all transactions: People trust bitcoin protocol instead of a specific private or public institution.
The disintermediation of banking systems has surely generated some of the fascination behind bitcoins but supporters also promote the benefits of bitcoins in several fields and sectors:
- The reduction in average transaction costs can generate savings from online payments (where credit card transaction fees can be lower) and unlock resources from fees paid on overseas workers’ remittances, where volumes are big and expected to grow.
- Cryptocurrencies can also be attractive for all those individuals who do not have a banking account.
- At the same time, as the supply of bitcoins is limited due to encryption limits and not controlled by a central bank, such cryptocurrencies could be less inclined to inflationary valuation than any other fiat currency.
Since 2009, the cryptocurrency world has been subject to some scandals, frauds and hacking attacks, generating doubts about reliability and security. Some question whether it is a speculative scheme and whether it may be a vehicle for criminal activity.
Opponents emphasize the risks associated with the adoption of bitcoins, pointing to the speculative nature, price volatility and potential overlap with criminal activities, with a focus on anti-money laundering. The lack of a global regulatory framework clearly amplifies those risks.
In fact, bitcoin today is not legal tender in any jurisdiction and it is hard to forecast a different short-term scenario as this would require structural changes to the definition of money and to how national and supranational authorities rule and control the creation of money.
Authorities’ response to the growing role of cryptocurrencies has not been the same, but almost all main jurisdictions have opted for a conservative approach and published documents to warn investors on the different kinds of associated risks. The decentralized and transnational nature of bitcoin makes it difficult for regulators to quickly define rules or a set of sanctions. Recently the New York State Department of Financial Services issued a proposal, the first of its nature, to define a regulatory framework; although still to be discussed and formalized, it represents an important first step for defining an organic approach to the need for clear rules.
While it’s hard to estimate how quickly bitcoins will be fully adopted, it is clear this trend cannot be ignored and must be monitored. The industry is growing: There are more players involved, more cryptocurrencies available and the degree of sophistication has increased. Engineers are now working on new technologies for reducing the costs associated with the creation (“mining”) of new bitcoins.
The industry itself has to decide whether to step forward and drive the change of embracing bitcoin into the payment system – the role of big players will be crucial in determining whether to speed up the rulemaking process, believing that bitcoins will have a positive impact on the market overall.
While opponents and defenders debate the cryptocurrency market, the availability of clear rules and a common regulatory framework could be the real game changer and determine whether this is only a speculative bubble or the first step in a big change.
How to access Bitcoin USD rates in Eikon
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